A common argument against privatization is that private providers will self-interestedly lobby to increase the size of their market. In this Article, I evaluate this argument, using, as a case study, the argument against prison privatization based on the possibility that the private prison industry will distort the criminal law by advocating for incarceration.

I conclude that there is at present no particular reason to credit this argument. Even without privatization, government agents already lobby for changes in substantive law—in the prison context, for example, public corrections officer unions are active advocates of pro-incarceration policy. Against this background, adding the "extra voice" of the private sector will not necessarily increase either the amount of industry-increasing advocacy or its effectiveness. In fact, privatization may well reduce the industry's political power: Because advocacy is a "public good" for the industry, as the number of independent actors increases, the dominant actor's advocacy decreases (since it no longer captures the full benefit of its advocacy) and the other actors free-ride off the dominant actor's contribution. Under some plausible assumptions, therefore, privatization may actually decrease advocacy, and under different plausible assumptions, the net effect of privatization on advocacy is ambiguous.

The argument that privatization distorts policy by encouraging lobbying is thus unconvincing without a fuller explanation of the mechanics of advocacy.

Even more justified would be the privatization of trash collection, firefighting, mail delivery and education, since it is not plausible that the private parties will lobby for more trash, more fires, more mail and more children.

Well what are the lobbyists competing for anyway? Government interference on their behalf. If the problem is improper government meddling in the marketplace, does it matter if the market players are public or private? Changing them won't fix the problem.

Getting the government out of "fixing" the free market seems to be the solution that everyone does their best to avoid realizing. Instead we get crap like campaign finance reform. You know, because the lobbying problem is caused by private actors, not the politicians whose regulations routinely put their industries in peril. A great example: Microsoft had zero lobbying presence in DC until after the anti-trust business. What favor is Microsoft courting in DC now? Ah right, the privilege of doing business without having the government prosecute them for succeeding.

What favor is Microsoft courting in DC now? Ah right, the privilege of doing business without having the government prosecute them for succeeding.

Copyrights, as well as patents and anticircumvention laws, give Microsoft a government-granted monopoly. Attempts to "prosecute them for succeeding" are really attempts to limit this government-granted monopoly. As such, Microsoft's lobbying is not pro-free-market in any way.

As an economist I think your "common argument against privatization" is wrong twice: first, all private entrepreneurs (old, new, potential) would like to increase their markets, but second, rather than increase them, they prefer to capture them (that is, to limit competition as much as possible). Owners of privatized companies are not different from any other entrepreneur: although they would like to increase their markets, they know that it is always better to capture them. Of course markets differ greatly and many are almost impossible to capture, but how many and to what degree vary greatly from country to country depending on the type of government. I suggest that you look at the market for adjudication and how lawyers have been able to capture both sides of the market: suppliers are required to be lawyers and customers must be represented by lawyers (as a case study I suggest the entry of Western law firms into the Chinese market, in particular the strategies that the successful ones have been following to limit entry of those still waiting).

Business has only one purpose, maximize returns to owners. Everything else is irrelevant. Government has a different imperative, to maximize the well-being of the citizenry.

Sometimes the two are congruent. More often they are not.

For example, in the Dubai Ports World case, if the operator can increase investor returns by cutting security they certainly will do so. In fact, Management has a fiduciary responsibility to do so. The only limitation on a business cutting cost in such a manner is for the Government to say it can’t. The invariable and eminently predictable reaction is that once the Government regulates, business will come back and say the regulation is overly burdensome.

I’ve spent 25 years in Corporate Finance, the last 15 in M&A, and I can say with some measure of confidence that “most” arguments about privatization are a grifter’s scam. While I respect the Economics Profession, and respect its scholarship, it has not (and cannot) be an expert in the other disciplines – accounting, finance and most particularly but rarely mentioned, valuation - which inform the other side of the privatization discussion.

Business is about profits and wealth creation. You say above “…I conclude that there is at present no particular reason to credit this argument…” Respectfully, I do not even need to read your paper to know that your conclusion is wrong. The reason it is wrong is that as a general rule, a private business either grows or dies. Quite simply, as growth slows, total enterprise value decreases. Due to slowing growth, both debt and equity capital become more expensive – or in the case of debt- may not even be available. When cost of capital exceeds the returns that capital can generate relative to risk and other alternative investments, measure the coffin.

Owners and management know this, and so growth is the Grail: Public policy be dammned. In the specific circumstance of your thesis – prison privatization - the capital markets will expect / demand a specific quantum of growth relative to capital at risk. Just throwing out a number, if the capital markets expect growth in free cash flow of 8-10% per annum, yet population growth is only 0.6% to 0.8% per annum, and one’s addressable market is stable or shrinking (lets call the addressable market that population demographic with the greatest propensity to commit crime. 18 – 25 year old males ), how the heck is management going to give that growth to the market? The only way to do that is to increase its customer base, i.e., criminals. If they weren’t before, Management will turn into “Law &Order” conservatives, real fast.